Mauritius DTAA Eligibility vis-à-vis Grandfathering

BACKGROUND

• The Asssessee¹ , is a Mauritius based entity, registered as a FPI with SEBI and possess a valid Tax Residency Certificate.
• During AY 2021-22 (‘relevant AY'), the Assessee earned long-term capital gains and short-term capital gains amounting to INR 225.71 crores and INR 39.66 crores respectively out of sale of shares/derivatives acquired prior to April 01, 2017. These capital gains were claimed as exempt by the Assessee in view of Article 13(3)/(4) of the India-Mauritius DTAA (‘the treaty').
• In addition, the Assessee incurred long-term capital losses of INR 11.29 crores during the relevant AY and had brought forward long-term capital losses of INR 45.67 crores from AY 2020-21. Further, the Assessee also had brought forward short-term capital losses of INR 9.94 crores after setting off INR 3.76 crores during the relevant AY. All these losses pertain to shares/derivatives acquired after April 01, 2017. These were carried forward by the Assessee for set-off in subsequent years.
• The Assessing Officer (‘AO') rejected the claim of exemption and computed capital gains after setting off long-term and short-term capital losses against the long-term and short-term capital gains and allowed the exemption only in respect of balance amount of capital gains.
• While rejecting the Assessee's claim, AO placed reliance on various rulings² to support that since methodology for computation of capital gains is not provided in the treaty, the same is to be decided as per the provision of the Income-tax Act, 1961 (‘the Act').
• DRP, on raising objections, also confirmed the order of the AO.
• Aggrieved by the order of DRP, the Assessee filed an appeal before the Tribunal.

CONTENTIONS OF ASSESSEE'S REPRESENTATIVE (‘AR')

• There is no dispute as to the facts that capital gains are earned from sale of shares/derivatives acquired prior to April 01, 2017 and capital losses pertain to shares/derivatives acquired post April 01, 2017.
• Prior to the amendment³ in the treaty, capital gains on alienation of shares of an Indian company were to be exclusively taxed in the country of residence of person holding shares i.e., Mauritius and no taxing right was available with India in relation to such capital gains.
• The brought forward short-term/long-term capital losses were to be carried forward to subsequent years, as per section 74 of the Act.
• Thus, the Assessee claimed exemption in respect of gains on shares acquired prior to April 01, 2017 and carried forward the losses on shares acquired post April 01, 2017 in accordance with the provisions of 90(2) of the Act and in no event these losses can be set off against capital gains earned.
• AR relied upon various legal precedents⁴ to support his claim.

ARGUEMENTS OF DEPARTMENTAL REPRESENTATIVE (‘DR')

• Tax liability in the hands of an Assessee is to be calculated first as per the provisions of the Act as there is no specific provision under the treaty for such a computation.
• Before applying the provisions of section 90(2) of the Act, the taxable income is required to be computed as per the Act which includes setting off and carrying forward of losses as well.
• The Assessee cannot adopt a selective approach in respect of capital gains from sales of shares as exempt as per the treaty and claim carry forward of losses under the Act.

TRIBUNAL'S OBSERVATIONS

• The AO, while computing exemption under the treaty, netted off the losses against the exempt gains, thereby taxing these gains indirectly, which are otherwise exempt as per the pre-amended Article 13(3)/(4) of the treaty.
• Relied on CBDT Circular⁵ that in case of a non-resident, if the total income is a loss, it is to be carried forward and cannot be set off against any income which does not form part of total income (i.e., foreign income of a non-resident).
• Allowed the exemption of capital gains on shares/derivatives acquired prior to April 01, 2017 and carry forward of losses on shares/derivatives acquired after April 01, 2017, placing reliance on various co-ordinate bench rulings⁶.

AURTUS COMMENTS

• This ruling carries forward the precedent set by some special and co-ordinate benches of the Tribunal wherein it was held that if there is an express provision in the convention giving benefit to an Assessee which might be contrary to the domestic law, then the provisions of the convention shall override and prevail over the domestic law to give any benefit expressly given to the Assessee.
• It can, thus, be concluded that that the provisions of the Act are not to be interpreted in a manner so as to run contrary to the beneficial provisions of section 90(2) of the Act.

Footnotes

1. TVF Fund Ltd. [TS-46-ITAT-2025(Mum)]

2. Foramer S.A. v. DCIT (1995) 52 ITD 115 CIT v. Davy Ashmore India Ltd. (1991) 190 ITR 626 CIT v. Vis